Upbeat on Growth in Market Share

The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. -- Ed.

 

2Q20 consolidated OP forecast at KRW41.3bn (+289.7% YoY)

Hite Jinro’s operating profit will likely continue on a steep YoY growth track through 2Q20 after exceeding market expectations by more than KRW20bn in 1Q20. Market share gains are continuing despite prolonged weakness in on-trade market conditions, and top-line growth coupled with a relative decline in promotion activities amid sluggish on-trade demand should drive visible improvement in margins. Consolidated operating profit is expected to reach KRW41.3bn in 2Q20, marking a 289.7% YoY increase on top-line growth of 17.6% YoY. With overall market conditions for alcoholic beverages mostly unchanged QoQ and provisions related to wholesalers seen limited compared with 1Q20, expectations remain upbeat for strong earnings in 2Q20.

Upbeat on structural growth in market share despite sluggish demand

Monthly sales volume of Terra reached near 3mn boxes in May, marking a hike by more than 1mn boxes vs. the monthly average of 2mn boxes recorded in 1Q20 as well as in 3Q19 when sales were growing in earnest. Sales should climb even further if the on-trade market rebounds on improvement in broader economic conditions. Amid rising expectations for structural growth in market share, concerns remain limited for a possible hike in promotion expenses in efforts to drive market share gains. Promotion expenses fell roughly KRW10bn YoY in 1Q20, and promotion and advertising expenses combined came in KRW7bn lower on a YoY basis for the quarter. For2Q20, we forecast a KRW2bn YoY increase in promotion expenses with advertisements on the rise from June. However, base effect could also kick in with promotion spend seen lower YoY through April-May this year and total promotion expenses in 2Q19 reported at higher-than-usual levels. Meanwhile, promotion spend in line with company guidance issued at the start of the year is unlikely to become a burden on earnings. For full-year 2020, we forecast promotion expenses at KRW250.9bn.

Retain BUY and raise target price by 8.7% to KRW50,000

Continued upward adjustments to earnings consensus have lowered the valuation burden for Hite Jinro shares. Despite the ongoing rally, share valuations should remain at undemanding levels backed by earnings improvement and the drop in promotion expenses below expectations. We continue to recommend Hite Jinro as our sector top pick at BUY with our target price revised-up by 8.7% to KRW50,000.

Copyright © BusinessKorea. Prohibited from unauthorized reproduction and redistribution